Becoming an Investor

The ABCs of Yields

What the number in front of the percentage sign really means.

Interest rates are so low these days that you need a magnifying glass to see the yield on many investments. But first, you have to know which yields to look at. Use our guide to see which yields matter most for savings accounts, stocks and bonds—and which you can ignore.

Savings accounts. For an interest-bearing account—a savings account, CD or money market—look at the APY, or annual percentage yield, which may differ from the simple interest rate quoted by the bank or credit union. The APY estimates the interest you’ll earn over the next 12 months, taking into account the effect of compounding. “It puts things in like terms, so you can compare a CD with a daily compound rate with one that compounds weekly,” says Greg McBride, chief financial analyst at Bankrate.com. Don’t confuse APY with APR, or annual percentage rate, which indicates the annual interest owed on consumer loans.

Money market fund yields differ from yields on the money market accounts at your bank or credit union. Money funds are mutual funds that invest in short-term bonds. They report a seven-day SEC yield, a calculation set by the Securities and Exchange Commission that projects what the fund will return over the next year—after fees—based on how the fund has performed over the past seven days.

Although a seven-day yield and an APY are totally different calculations, you can still compare the two (roughly) if, say, you’re trying to choose between a money market account and a money fund. “At the end of the day, an APY and a seven-day yield are both projections of what you may earn in interest over the course of a year,” says McBride.

Stocks. Investors in dividend-paying stocks want to look at the forward dividend yield, which takes the most recent payout, annualizes it, then divides by the stock price to estimate your annual yield. Don’t pay much heed to the trailing 12-month (TTM) dividend yield. It’s a backward-looking ratio of total payouts over the past year to the share price and won’t account for more recent cuts or hikes.

Bonds. Investors in individual bonds should focus on yield to maturity. A bond’s coupon rate or current yield can tell you how much income a bond will generate, but those measures won’t signal what kind of total return the bond might deliver. A yield to maturity can, because it factors in your purchase price—whether above or below the bond’s face or par value—as well as the bond’s coupon rate and the time remaining to maturity.

Bond funds, which buy and sell bonds all the time, don’t have a yield to maturity. That’s why investors should scrutinize the fund’s SEC 30-day yield. It’s a standardized calculation that estimates the yield an investor will receive over the next 12 months based on the income generated over the past 30 days, and it accounts for fees, too. “It puts everything on an even footing, so I can compare a Pimco fund with one from Eaton Vance,” says Marc Moran, Eaton Vance’s director of investment analytics and risk management.

Less helpful these days is a bond fund’s TTM yield or 12-month yield. Interest rates have fallen so sharply since early 2020 that “the income of the past 12 months is a whole lot different than the past 30 days,” says McBride. The TTM yield of Pimco Total Return fund at last report was 2.71%, for example, compared with an SEC yield of 1.02%.

Most Popular

When Could We Get a Third Stimulus Check?
Coronavirus and Your Money

When Could We Get a Third Stimulus Check?

President Biden and others in Congress are pushing for a third-round of stimulus checks, but it might be a while before we get them.
January 20, 2021
Where's My Stimulus Check? Use the IRS's "Get My Payment" Portal to Get an Answer
Coronavirus and Your Money

Where's My Stimulus Check? Use the IRS's "Get My Payment" Portal to Get an Answer

The IRS has an online tool that lets you track the status of your second stimulus check.
January 18, 2021
20 Best Stocks to Buy for the Joe Biden Presidency
stocks to buy

20 Best Stocks to Buy for the Joe Biden Presidency

Joe Biden has been sworn in as America's 46th president. These are 20 of the best stocks to own under the new administration.
January 20, 2021

Recommended

Bonds: 10 Things You Need to Know
Investing for Income

Bonds: 10 Things You Need to Know

Bonds can be more complex than stocks, but it's not hard to become a knowledgeable fixed-income investor.
July 22, 2020
Stock Market Today 1/22/21: Nasdaq Scratches Out Another Record Finish
Stock Market Today

Stock Market Today 1/22/21: Nasdaq Scratches Out Another Record Finish

The Nasdaq came out of a mixed day with yet another fresh high. More interesting were Friday's moves by IBM, Intel and GameStop.
January 22, 2021
Why GameStop (GME) Stock Has Gone on an Epic Tear
stocks

Why GameStop (GME) Stock Has Gone on an Epic Tear

GameStop has rocketed 2,419% since April. However, recent heat under GME shares has been fueled not just by good news, but also doubters calling it qu…
January 22, 2021
SEC Dings Robinhood for Trading Charges
Business Costs & Regulation

SEC Dings Robinhood for Trading Charges

The complaints are a reminder to investors who pay low or no commissions to investigate more-opaque costs.
January 21, 2021